Theme 4 - Role of the state in the economy

Question 1

What is the difference between current and capital expenditure?

Answer 1

Capital is expenditure on investments that have long-term rewards
Current is expenditure on day-to-day activities that have short-term rewards

Question 2

What are transfer payments?

Answer 2

Payments by the government directly to someone else with no rewards

Question 3

What are the 5 reasons why the govt spends money?

Answer 3

Market failure
Redistribute incomes
Supply public and merit goods
support the UK industry
Manage the economy

Question 4

What are the 3 main factors that affect public expenditure in global countries?

Answer 4

• Age distribution
• Incomes
• Political values

Question 5

How may age distribution impact public spending?

Answer 5

The higher the age in the country, maybe more is spent on healthcare. Younger population may mean more spending on education

Question 6

How do incomes impact public spending?

Answer 6

When national income rises, people demand more public expenditure. For example, more people may demand railway to get to work etc

Question 7

How do political values impact public spending?

Answer 7

Countries that have lots of trust in the government may allow more public spending

Question 8

The significance of changing public expenditure on productivity and growth

Answer 8

An increase on spending on hospitals may mean more people are healthier to work
However could mean that the money is spent on salaries and beauracracy

Question 9

The significance of changing public expenditure on living standards and equality

Answer 9

Increased spending on benefits means more income and reduces inequality
Improves their living standards however, public spending may not go towards the poor

Question 10

What is the difference between resource crowding out and financial crowing out?

Answer 10

Resource - when the public sector buys factors of production which crowds out the private sector.
Financial - government borrowing leads to high interest rates for private sector spending

Question 11

What is the difference between direct and indirect tax?

Answer 11

Direct = paid directly to the govt
Indirect = paid by the producer when consumer purchases

Question 12

What is a regressive tax?

Answer 12

The proportion of tax you pay decreases as the price, income and profit increases

Question 13

What is a progressive tax?

Answer 13

The proportion of tax increases when the price, income and profit increases

Question 14

What is a proportional tax?

Answer 14

The proportion of tax paid remains the same regardless of the price, income and profit

Question 15

What are the 7 factors that affect tax rates?

Answer 15

• Tax revenues
• incentive to work
• income distribution
• price level
• output and employment
• trade balance
• FDI flows

Question 16

What does the Laffer curve show?

Answer 16

When tax rates increases, the government gains more tax revenue but, their is an optimum point where tax revenues won’t increase further because being become decentivized to work

Question 17

What do tax rates do to income distribution?

Answer 17

An increase in income tax means less people have disposable income and so the poorest will suffer the most

Question 18

What does price level do to tax rates?

Answer 18

An increase in AD will mean price levels increase. This means that tax revenues may increase for example through VAT

Question 19

What does output and employment do to tax rates?

Answer 19

When indirect tax increases, workers can afford less. Ad then fall which reduces prices and so output and employment falls

Question 20

What does the trade balance do to the tax rate?

Answer 20

lower taxes means more people have income and so they import more

Question 21

How do FDI flows impact the tax rate?

Answer 21

A reduction in direct tax means high earners have more disposable income. Encourages foreign firms to invest in other countries.

Question 22

What is the difference between a structural deficit and cyclical deficit?

Answer 22

Structural = A deficit in a boom
Cyclical = A deficit that occurs during a recession

Question 23

What is the difference between a fiscal deficit and a national debt?

Answer 23

A fiscal deficit is when a public expenditure is greater than tax revenue. A national debt is the total of all debts

Question 24

What is the distinction between automatic stabilisers and fiscal policy?

Answer 24

Automatic stabilisers is when the government doesn’t intervene in the economy however discretionary fiscal policy is when the government uses their ability to make decisions actively to make a change

Question 25

What are some factors influencing the size of fiscal deficits?

Answer 25

• State of the economy - typically worsens in a recession because the govt spends more
• Tax rates - higher tax rate may improve it
• Unexpected events such as a recession, war, COVID, brexit etc

Question 26

What are the factors influencing the size of national debts?

Answer 26

• Size of fiscal deficits
• Government fiscal policies

Question 27

What are the main reasons why the size of fiscal deficits and national debt may be significant?

Answer 27

• May push up interest rates as the demand for borrowed money by the govt increases
• Financial crowding out if the government raises bond interest too
• Resource crowding out if government borrows to spend on FOP leading to less private sector spending
• This influences the tax rates in the long run - impacting future generations

Question 28

What are the reasons as to why a fiscal deficit and national debt may not be as significant?

Answer 28

• They improve the supply side of the economy
• Less poverty and inequality
• Improved development
• The UK for example has been in a budget deficit and had national debt for many years

Question 29

What is wagner’s law?

Answer 29

Public expenditure increases as national income increases. For example, as incomes rise, people have more money to spend on sending their children to skl or getting better healthcare

Question 30

What is a drawback of wagner’s law?

Answer 30

This is that when incomes was to rises, some public goods may fall such as the demand for public transport. This is therefore an inferior good

Question 31

What are some measures used to reduce fiscal deficits and national debts?

Answer 31

• Supply side policies - Reducing public expenditure and increasing tax rates

Question 32

What are some policies that may be used for changes in interest rates and the money supply?

Answer 32

• loose/contractionary monetary policies
• Quantitative easening/tightening

Question 33

What are some measures used to reduce poverty and inequality?

Answer 33

• Supply-side policies such as infrastructure and education spending
• tax changes (market-based supply side policies)

Question 34

What are some measures to increase international competitiveness?

Answer 34

• Foreign currency transactions
• Interest rate changes
• Tax changes to encourage FDI

Question 35

What are two measures used to control global companies?

Answer 35

• The regulation of transfer pricing
• Limits to government ability to control global companies

Question 36

What is the Arm’s length principle?

Answer 36

Any transaction between daughter companies, the price should be the same as it would be if the company was selling to a third company

Question 37

When is the Arm’s length principle used and how can governments find the information to regulate it?

Answer 37

It is used when regulating transfer pricing and the government can look at comparable transactions

Question 38

What company was fined for transfer pricing?

Answer 38

Apple was fined $13bn

Question 39

What does it mean when a business is footloose?

Answer 39

A global company has the ability to move elsewhere where their aren’t regulations like transfer pricing regulations

Question 40

Why may some developed companies not want to set transfer pricing regulations?

Answer 40

Because companies are footloose so this may reduce their FDI flows, exports etc

Question 41

How can a global company being footloose and being involved in transfer pricing be regulated?

Answer 41

Global agreements for the same policies in every country

Question 41

How can a global company being footloose and being involved in transfer pricing be regulated?

Answer 41

Global agreements for the same policies in every country

Question 42

What are the problems facing policymakers when applying policies?

Answer 42

-Risks and uncertainties
- Inaccurate information
- Controlling external shocks